Mitt Romney's tax burden, dead babies, etc.

Suppose Jack and Jill each have a job this year that pays $50,000. Suppose further that the only activity that makes Jack happy is eating dead baby sandwiches, while the only activity that makes Jill happy is drinking dead baby smoothies. Let the price of a dead baby sandwich be $100, and the price of a dead baby smoothie be $200. This year, therefore, Jack will eat 500 dead baby sandwiches, and Jill will drink 250 dead baby smoothies. Is there any economic inequality between Jack and Jill? Of course not. Though Jack eats more than Jill drinks, they both have $50,000 to begin with. Jack only eats more than Jill drinks because Jack has simpler tastes than Jill.

Suppose instead that the only activity that makes either of them happy is snorting dead baby powder. Let the price of one gram of dead baby powder be $50. Now suppose that Jill buys a bond from Babyfart McGeezax at a price of $25,000, with a 10% yield to maturity, that matures in a year. In year 1, therefore, Jack snorts 1000 grams of dead baby powder, while Jill snorts only 500 grams. In year 2, however, Jack snorts 0 grams of dead baby powder, while Jill snorts 550 grams. In total, Jack snorts 1000 grams, while Jill snorts 1050 grams, of the very same stuff. Is there any economic inequality between Jack and Jill? Of course not. Though Jill snorts more than Jack, they both have $50,000 to begin with. Jill only snorts more than Jack because Jack has simpler tastes than Jill.

What is the difference between the first and second cases? Apparently, it is that in the first case, they consume different quantities of different stuff, while in the second case, they consume different quantities of the same stuff. But this appearance is deceiving, for a gram of dead baby powder this year is not at all the same thing as a gram of dead baby powder next year. Comparing Jill's 1050 grams over two years to Jack's 1000 grams over one year makes no more sense than comparing Jill's 250 smoothies to Jack's 500 sandwiches. In both cases, Jack and Jill have the same power over society's resources--they just choose to exercise their powers differently.

Taxing Jill on her $2,500 of investment income makes no more sense, from the perspective of economic equality, than taxing Jill for preferring dead baby smoothies to dead baby sandwiches. What's more, taxing Jill on her investment income encourages her to be more like Jack, since Jack pays no tax besides what he pays on his earned income. Unless you think society saves too much (if anything, we save too little), this is a bad idea. On grounds of both efficiency and equality, therefore, we ought to tax Jack and Jill only on their earned income (or alternatively, on their consumption), and not tax Jill at all on her investment income.

In short, if anything Mitt Romney pays too much, rather than too little, in taxes.